And while Dihua Street is still the best place in Taipei to buy a metre of colourful fabric, a kilogram of oolong tea or a bag of walnut-stuffed dates, it has also been rejuvenated by a new generation of shops and cafes.

"We love old stuff, but we realised we didn't just want to put old things in our store, we wanted to be on an old street," says Wei Yen, a designer at Mogu, a firm known for its Booday brand of homeware and clothing. It recently moved its offices to a shophouse on Dihua Street, where it also runs a travel-themed shop selling bags and other accessories.

Kuo Chi-chou waited a year to find a spot on Dihua Street to open a cafe and grocery store selling Taiwanese products.

"I like the history and the atmosphere here. There's really only one old street in Taipei," he says. His shop is in an ornate grey stone structure whose lush courtyard is ringed by design boutiques, cafes and a restaurant.

So how did Dihua Street transform itself from a shabby reminder of more prosperous days into one of Taipei's most up-and-coming streets? The answer lies in a government-led urban renewal programme very different to Hong Kong's raze-and-rebuild model. Taipei's Urban Regeneration Stations (URS), which began life in 2010, are a collection of old buildings that have been restored and leased out to cultural and community groups, with the intention of rehabilitating old neighbourhoods from the ground up.

"These are initiatives that go beyond preservation and act as seeds for community capital," says architect Hendrik Tieben, an associate professor at Chinese University who has tracked the evolution of the URS programme. "It started as a process where people became more involved. They wanted to make a more democratic planning process."

The project's roots go back to the work of community activists who fought traditional redevelopment practices by espousing more grass-roots, community-led change. After the success of Treasure Hill, a squatter settlement slated for clearance that was converted into an artist village, Taipei's Urban Redevelopment Office - later renamed the Urban Regeneration Office (URO) - began working with the owners of historic properties. Some donated their buildings to the government in exchange for development rights elsewhere, while others leased their space to the scheme. Groups interested in operating the stations were invited to submit applications.

"It's an open-ended mission, an experiment," says URO officer Jan Yu-chi, who oversees the programme. It owes much of its conceptual framework to Finnish architect Marco Casagrande, who worked on Treasure Hill and espoused a policy of piecemeal urban interventions rather than grand redevelopment strategies. "We call it urban acupuncture," says Jan.

Many of the URS are concentrated in the Dadaocheng, the district surrounding Dihua Street, which was one of the original two Fujianese settlements that predated modern-day Taipei. Each is assigned a name based on its street number. URS155 offers cooking workshops with traditional ingredients found on the street. URS21 transformed an abandoned liquor depot into a hub for designers and artists. URS44 mounts exhibitions on the neighbourhood's history.

One of the street's newcomers is Blue Dragon, which took over URS127 a year and half ago from a university architecture department. Though it appears modest from the street, the space is actually a rambling three-storey shophouse that is more than 30 metres deep, with five large rooms that are used for a library, exhibitions and workspaces.

Like other shophouses on Dihua Street, the building was owned by a multigenerational family, which ran a business in the front room and lived upstairs. It had two kitchens, several toilets and a courtyard that allowed light and air into the centre of the structure.

Even more important than the house itself is its relationship to the neighbourhood. "If you do anything here, it has to relate to the neighbours," says Blue Dragon's Wang. Dihua's traditional businesses are tight-knit - if one cannot fill a large order, its neighbours will chip in - but they are sceptical of outsiders. "It's like a village," she says. "They're businesspeople. They don't like lazy people. They don't like things they can't understand."

Wang worked hard to win them over.

Early on, she staged an exhibition about traditional Chinese cakes. "We involved all the famous cake stores, all the old ones - they do models of their cakes very beautifully," she says.

Later, Wang discovered that a traditional Chinese medicine doctor grew his own herbs, so she invited him to transplant his garden to URS127's backyard. The doctor's organisation, the Yupintang TCM Foundation, now runs a herbal tea cafe with a terrace overlooking the garden.

"The more we do, the more we find treasure," says Wang. "This place makes our work more valuable, and it lets our neighbours know that their business can be better when culture is involved."

In the boom days of the late 1980s, Taipei's government slated Dihua Street for demolition, which led to a community backlash. In 1998, a historic district was established along the street.

In 2001, a system known as Transfer of Development Rights (TDR) was established, to compensate building owners who renovate historic properties, in exchange for legal restrictions that prevent future redevelopment. Though the URS may have provided inspiration, TDR cash is paying the way for Dihua Street's transformation.

"The hardware came in before and now they have what they call 'soft urbanism'," says Tieben.

He says that Taiwan's democratic transformation in the 1990s laid the groundwork for more community involvement in urban planning, which in turn gave rise to projects like URS.

"There is a strong feeling of ownership of the city that seems to be quite different to Hong Kong," he says. "How broad the impact is, how many people are affected, I don't know. But it's a beautiful idea."